Cryptocurrency in Portugal
The tax on transactions involving cryptocurrencies, digital currencies that operate outside of traditional government and banking control, is an increasingly relevant topic as the use and popularity of cryptocurrencies grows.
However, many countries are beginning to regulate the use of cryptocurrencies and require users to pay taxes on their transactions. This is because the use of cryptocurrencies can lead to a range of tax issues, including tax evasion, money laundering, and the financing of illegal activities. In this regard, it is important to understand how taxes apply to cryptocurrencies and how to comply with tax obligations related to them.
The State Budget for 2023 in Portugal includes, for the first time, the taxation of crypto assets, ending the previous perception that the use of these assets would be free of tax liabilities. Since then, you should consider three types of situation that cryptocurrency can fall into:
1 – In the case of personal income tax:
- a) Category B – Business and professional income
Article 4(1)(o) of the CIRS considers commercial and industrial activities to be operations related to the issuance of crypto-assets, including the mining or validation of crypto-asset transactions through consensus mechanisms. According to Article 28(1) of the CIRS, the determination of business and professional income is made on the basis of the rules of the simplified regime or organised accounting. Although the basis for determining the income of taxable persons is optional, there are rules to be followed. Paragraph 2 of the same article states that taxpayers who opt for the simplified regime are only covered if the income does not exceed the gross annual amount of €200,000 and the determination of taxable income is obtained by applying the coefficients referred to in article 31 of the CIRS. In the event that the taxpayer opts for organised accounting or terminates the simplified regime because the amount of €200,000 has exceeded the amount of €200,000 in two consecutive tax periods or in a single financial year (Article 28(6) of the CIRS), the determination of the taxable income is in accordance with the rules established in the CIRC (Article 32 of the CIRS).
For the calculation of taxable income in relation to transactions with cryptoassets, the law establishes the application of the coefficient 0.15 (paragraph a) no. 1 of article 31 CIRS), that is, 15% of the income obtained will be taxed at the general progressive rates, referred to in article 68 of the CIRS, together with the remaining income. Under this regime, expenses for the calculation of taxable income are not deductible. In the organized accounting regime, income and expenses are manifested at the time of occurrence, that is, on the date of the transaction, here the expenses effectively incurred will be deducted from the full amount of income. The determination of the tax rate will be based on the accounting result. Considering the environmental impact associated with mining activity, as recommended by the European Commission in its Communication «Digitising the energy system – EU action plan», it is proposed to penalise this activity (PS, 2022) by applying the coefficient 0.95 to income from the mining of crypto-assets (Article 31(1)(d) of the CIRS). Mining, also called Proof of Work (PoW), is a decentralized consensus mechanism in which network members strive to solve an encrypted hexadecimal number. In other words, miners compete with each other to solve a complex mathematical puzzle and the first one who finds the solution has the right to add the next block to the Blockchain, receiving a «reward» for the work done. To be a miner you need to invest in computer equipment and be subject to high energy costs to supply the machines that try to solve the calculations (Binance Academy, 2023).
As most of the consideration is through «crypto-to-crypto» transactions and the code considers that taxable income is obtained at the time of the onerous sale of the cryptoassets (paragraph 17 of article 31 of the CIRS), the applicability of those coefficients can under no circumstances be verified.
- b) Category E – Income from Capital
As an alternative to mining and in order to contribute to the reduction of environmental impact and energy costs, one of the ways to maintain a decentralized consensus is staking, also known as Proof of Stake (PoS). Some platforms for certain crypto «coins» allow you to «freeze» a set of tokens, that is, you deliver the cryptocurrencies to the network, they are «locked» and are usually remunerated in crypto assets as well. In PoS, participants are called validators and are randomly selected to create the next block. The one with the highest amount of staked coins, the more likely they are to be selected (Binance Academy, 2023). According to Article 5(2)(u) of the CIRS, capital income is all remuneration resulting from operations with cryptoassets, however, when the income is obtained in token, no tax is paid: the legislator decided that all income that takes the form of cryptoassets; they are not subject to taxation as capital income (Article 10(20) of the CIRS), and taxation occurs only at the time of the sale of these crypto-assets, following the capital gains rules (Article 5(11) of the CIRS). Although capital income is subject to withholding tax, at the withholding rate of 28% (subparagraph a) no. 1 article 71), capital income that occurs from operations with crypto-assets is exempt from withholding tax, as described in paragraph 5 of article 101-B.
- c) Category G – Equity increases
With regard to the purchase and sale of crypto-assets that do not constitute securities and that are not considered business, capital or property income, the legislator introduced a new subparagraph in the definition of capital gain, considering the onerous sale of crypto-assets (subparagraph k) no. 1 article 10 CIRS), as such it must be declared as income of category G (subparagraph a) no. 1 article 9 CIRS). This income, considered as capital gains and subject to personal income tax, corresponds to the difference between the value of the sale and the value of the purchase (Article 10(4)(a) of the CIRS). Since the market value at the date of sale of crypto-assets is classified as the market value at the date of sale (Article 52(4) of the CIRS), it is permissible to deduct the expenses inherent to the acquisition and disposal of the crypto-assets (Article 51(1)(b) of the CIRS). In addition, for the determination of capital gains income, the regime recommends the application of the FIFO method «first in first out» (Article 43(6)(g) of the CIRS), following the same logic as other securities realities. As a rule, the special rate of 28% is applicable to this capital gain income, as stated in Article 72(1)(c) of the CIRS, however, the taxpayer may opt for aggregation, under paragraph 13 of the same article. By opting for aggregation, the capital gains income will be added to the other income and after the respective deductions have been made (Article 22(1) of the CIRS), the rate to be applied will be determined in accordance with the table set out in Article 68 of the CIRS (Article 22(10) of the CIRS). If, hypothetically, it opts for aggregation, and the balance of the sale of crypto-assets is negative (capital loss) in a given year, it can be carried forward to the following five years (Article 55(1)(d) of the CIRS). However, only capital gains resulting from the onerous sale of crypto-assets are subject to IRS taxation, if these gains occur from crypto-assets held for a period of less than 365 days, as referred to in paragraph 19 of article 10 of the CIRS. It should be noted that the legislator benefits the investor in crypto-assets by exempting the gains from the onerous sale of crypto-assets held for more than one year, deviating from the coherence maintained with the taxation of securities, in which, regardless of the term of their holding, they are always taxed at the rate of 28%.
Under Portuguese law, personal income tax is levied on all income, including income obtained outside the territory, if the taxpayers are resident in Portuguese territory. In the case of non-residents, it is levied on income obtained in Portuguese territory. Residents are those who have stayed in it for more than 183 consecutive days: having stayed for less time, they enjoy housing that suggests the intention to maintain and occupy it as a habitual residence, as provided for in articles 15 and 16 of the CIRS. If a national taxpayer who holds crypto-assets, decides to leave Portugal, losing the status of resident in Portuguese territory, this objective fact is equivalent to the onerous disposal of his crypto-asset portfolio, and may have to be paid tax without having occurred an effective sale (paragraph 22 of article 10 CIRS).
2 – How does the cryptocurrency tax return work?
The declaration of the tax on cryptocurrencies in Portugal is carried out through Annex G of the IRS declaration, which is the form that must be filled out by taxpayers who have obtained capital gains, including those obtained from the sale of cryptocurrencies.
To complete Schedule G, it is necessary to provide the details of cryptocurrency transactions carried out during the fiscal year, including the purchase and sale dates, the amount of cryptocurrencies involved in each transaction, the purchase price and the sale price. Based on this information, the taxpayer must calculate the profit or loss made from cryptocurrency transactions.
If the taxpayer made a profit from the sale of cryptocurrencies, he must declare this capital gain and pay tax on it at the autonomous rate of 28%. However, capital gains obtained from the sale of cryptocurrencies held for more than 365 days are exempt from tax in Portugal.
3 – If my wallet has appreciated, but I haven’t made transactions, do I have to declare it?
You don’t need to declare crypto asset portfolio valuation. If your cryptocurrency portfolio has increased in value, but you have not made any transactions, it does not imply that you have made capital gains from the sale of cryptocurrencies.
Therefore, in this specific situation, you will not have to declare anything to the competent tax authority. This is because, in terms of personal income tax, only realised capital gains (and not latent capital gains) are taxed. Taxation in the capital gains category is deferred to the time of conversion to legal tender, assets other than cryptocurrencies and services. Transfers between wallets, addresses or own accounts are a non-taxable fact.
Even when there is capital gain, there are cases where you do not need to declare, for example, if you hold the crypto asset for more than a year.
When filing the IRS return, it is important to remember that, in addition to declaring the gains obtained from the sale of cryptocurrencies, it is necessary to select the option to include IRS Category G. This means that all gains included in this category (such as capital gains, for example) will be subject to taxation at progressive IRS rates.
4 – If I have losses, do I need to declare them?
There is no need to declare losses on cryptocurrency transactions. However, if you have made a negative balance from the sale of cryptocurrencies in a given tax year, it is possible to carry forward that negative balance over the next five years to deduct it from any gains made from the sale of cryptocurrencies in those subsequent years.
However, in order to be able to make this deduction, it is necessary to opt for the aggregation of Category G in the year in which you obtained the negative balance and in the following years in which you intend to deduct it. In this way, it is possible to reduce the taxation payable in case of future gains.
Exit Tax
If an individual ceases to be a tax resident in Portugal, an «Exit Tax» of 28% will be imposed on all crypto assets. This tax applies in a similar way to a sale, based on the difference between the market value and the acquisition value determined through FIFO.